The Korean Supreme Court determined that royalties earned from licensing patents registered only in the United States and not in Korea constitute a taxable income accrued in Korea and are therefore subject to Korean taxation if the technology covered by the U.S. patents is used in Korea (Supreme Court en banc Decision 2021 Du 59908, rendered on September 18, 2025), departing from its prior decision rendered in 1992 (Supreme Court Decision 91 Nu 6887, rendered on May 12, 1992).

▶Facts of the Case and Lower Court Rulings 

In 2013, SK hynix (the "Plaintiff") settled a patent infringement suit filed by a U.S. patentee in the United States, and agreed to pay annual royalties of USD 1.6 million in return for the use of more than forty U.S. patents.  In 2014, the Plaintiff paid the royalties to the U.S. patentee and withheld approximately USD 222,000 in corporate taxes, but subsequently sought a refund thereof on the ground that the royalties were not taxable in Korea.  

The Korean tax authority rejected the refund request, and the Plaintiff brought the present action.  The lower courts, following the 1992 Supreme Court precedent, ruled in favor of the Plaintiff that the royalties concerned U.S. patents and therefore did not constitute a taxable income in Korea.

▶Legal Framework and Issue 

Article 14(4)(a) of the Korea-U.S. Tax Treaty defines royalties broadly to include payments for the use of intangible assets, such as patents, and Article 6(3) allocates taxing rights over royalties to the country where "the intangible assets are used."

Accordingly, the key issue in this case was how to interpret the "use of intangible assets"; specifically, whether it should be understood as the actual utilization of the patented technology, or the exercise of patent rights.

▶Supreme Court Decision 

Majority Opinion

The Supreme Court held that royalties paid under U.S. patents may still constitute a taxable income in Korea if the manufacturing methods, technologies, information, or the like covered in such patents are actually used in Korea, for the reasons that: 

●Article 2(2) of the Korea-U.S. Tax Treaty provides that any term not defined in the Treaty shall have the meaning under the domestic law of the contracting state, unless the context otherwise requires.  Since "use of a patent" is not defined in the Treaty, its meaning must be determined under the Korean law.

●Article 93(viii) of the former Korean Corporate Tax Act, which governs the present case, stipulates that, even if a patent is registered abroad, if the patented technology is actually practiced or used in Korea, it shall be deemed "used" in Korea irrespective of its domestic registration. 

●Thus, "use of a patent" should be understood as the actual utilization of the patented technology, not the exercise of patent rights.

●The principle of patent territoriality relates only to the jurisdictional reach of patent rights and cannot serve as the standard for determining the location of use of patented technology.

●Accordingly, if the Plaintiff actually used the patented technology covered in the U.S. patents in the course of manufacturing semiconductors in Korea, such use should be regarded as "use of an intangible asset" in Korea, and the royalties earned by the U.S. patentee are, therefore, subject to taxation in Korea. 

Dissenting Opinion 

The dissenting opinion interpreted "use of a patent" under the Korea-U.S. Tax Treaty as the exercise of rights within the domain where the patent right is effective; and supported the lower court’s decision that royalties for U.S. patents were not subject to Korean tax withholding, under the reasoning that:

●The term "patents" in the Korea-U.S. Tax Treaty refers to rights that arise upon application, examination, and registration before the Patent Office; in other words, patent rights.  Therefore, "use of a patent" under the Treaty must be interpreted as the exercise of patent rights.  

●Under the principle of patent territoriality (presumably defined in the Paris Convention), foreign patents not registered in Korea cannot be regarded as "used" in Korea.

●The majority’s interpretation would result in a usurpation or undermining of an international treaty by allowing a domestic law to effectively displace the application of the treaty. 

▶Implications of the Decision

In this landmark ruling, the Supreme Court has overturned the long-held precedent and established a new standard: royalties paid by a domestic licensee of patents registered only in the U.S. may be treated as taxable income generated in Korea if the patented technology is practiced in Korea.  Although the case involved patents registered in the U.S., the same reasoning is likely to apply under other tax treaties with similar structures.